Capital investments are certainly important and I would not like to see it shrink but there is a lot of future growth that does not require a lot of capital investments.Our world is increasing digitized which usually means lower capital costs.

The are way less capital intensive options than fiber optic cable and there is a lot of work being done currently that is not based on fiber optic cables

Creating Aps for smart phones is being called the next gold rush. It requires very little capital investment. Google and Facebook did not start with large amount of capital investments. Cloud Computing ( Computer technology becoming a Utility ) is reducing costs for starting new businesses.

"An interview with Nicholas Carr, author of The Big Switch: Rewiring the World, from Edison to Google.

You write that the computer is escaping its box. How so?

Computers used to be self-contained devices. If you wanted to do something with your PC, you had to buy a piece of software and install it on your hard drive. That began to change when the World Wide Web arrived in the 1990s. Suddenly, if you had a network connection and a browser, you could tap into millions of web pages that were stored not on your PC but on other people’s computers. The PC began to turn inside out—what was important wasn’t what was inside its case but what was outside it.

But that was just the start. Today, a far more radical change is under way, thanks to the proliferation of very fast broadband connections. Rather than just using the Internet to visit web pages, you can use it to run very sophisticated software - the kind of software that you used to have to run on your own drive. Computing is breaking out of its old beige box and moving onto the Internet.

The World Wide Web, you say, is turning into the World Wide Computer.

Right. Now that they’ve been connected with fiber optic cables, all the machines hooked up to the Net are merging together into one giant, incredibly powerful computer - the World Wide Computer. Our own personal PCs, not to mention our cell phones and gaming consoles, are turning into terminals hooked up to that big shared computer. They get most of their power and usefulness from all the software and information that’s floating around out on the Net.

In The Big Switch, I draw a parallel to what happened with the invention of electric utilities a hundred years ago. Before the electric utility, people had to generate their own power to run their machines - with waterwheels or steam engines or just their own muscles. But as soon as the wires for the electric grid were strung, they no longer had to worry about producing their own power. Power was delivered to their home or their office over the network, and all they had to do was plug an appliance into the socket in the wall. That’s what’s happening to computing today. It’s turning into a service supplied over a network. It’s becoming a utility.

What does the rise of utility computing mean for businesses, which have been the biggest buyers of computers and software?

You know, for most of us, the shift in the nature of computing has been almost invisible. As long as you have a web browser and a fast Internet connection, you don’t really care where your software is running. YouTube, MySpace, Facebook, Wikipedia, Google Search, Yahoo Mail, Flickr - none of those programs is running on your PC’s hard drive. They’re all utility services that you share with thousands of other people. And that’s fine, because none of us really cares where our software is coming from—we just want stuff that works.

For companies, particularly big ones, it’s a completely different story. They’ve spent millions or even billions of dollars building private data centers, filling them up with complicated computer systems, and hiring squads of IT professionals to keep everything running. Ever since businesses began installing computers a half a century ago, they’ve assumed that they had to buy and maintain all their own hardware and software. Now, suddenly, that assumption is being overturned, and businesses have to begin rethinking all their past decisions and investments. Do they really need all those expensive systems? Do they even need their IT departments? It’s as big a change as companies faced in the early Eighties when personal computers displaced mainframes – maybe even bigger.

That’s going to shake up the technology industry, isn’t it?

The entire computing industry is going to be turned on its ear. There are a whole lot of big tech companies - Microsoft, IBM, Oracle, Hewlett-Packard, Dell, and many others - that have made fortunes selling the same pieces of hardware and the same software programs to thousands of different customers. As computing turns into a utility and systems begin to be shared, a lot of those sales are going to dry up. Instead of buying new computers, companies will just subscribe to various software services served up online for a low monthly fee. Most of today’s computer giants see this transformation coming, and they’re scrambling to remodel themselves to compete in the new world. Some will adapt successfully. But some are going to fail. And new utility companies - companies like Google and Salesforce.com and even Amazon—are already moving in to take their place.

Microsoft presents a particularly interesting case because it’s been the paragon of the old, PC-centered mode of computing. One of the chapters in my book is called “Goodbye, Mr. Gates.” Gates has announced that he’ll retire from Microsoft in the summer of 2008, and you really couldn’t ask for a better symbol of the change taking place in the industry. The world that Gates and the other PC pioneers created is being dismantled, bit by bit and byte by byte. Ten years from now, it will be a very different industry.

But this isn’t just a business story.

Not at all. The implications of the transformation of computing go far beyond business or even technology. When electricity turned into a utility, it pushed the price of power down dramatically, and that set off a chain reaction that fundamentally changed not only business but media, culture, education, and, in the end, all of society. The expansion of the middle class, the spread of secondary education, the rise of mass media and culture, the flood of consumer products—none of those things would have happened without the cheap current pumped out by big utilities.

I think utility computing is going to send equally big shock waves across society. In fact, we can already see the early effects all around us – in the shift of control over media from institutions to individuals, in people’s growing sense of affiliation with “virtual communities” rather than physical ones, in debates over the security of personal information and the value of privacy, in the export of the jobs of knowledge workers, and in the growing concentration of wealth in a small slice of the population. All these trends either spring from or are propelled by the rise of Internet-based computing. As information utilities grow in size and sophistication, the changes to business and society - and to ourselves - will only get broader and more intense.

Give us an example.

I’ll give you two examples, both of which I discuss in the book. First is the distribution of wealth. Usually when a major new technology comes along, it leads to the loss of certain types of jobs, but it ends up creating a whole lot of new kinds of jobs. We saw that with electricity, which brought a boom in both unskilled factory jobs and skilled white-collar jobs. Computerization is taking a very different course. It’s allowing companies to replace all sorts of workers, skilled and unskilled, with software, but it isn’t creating big new classes of well-paying jobs in the place of the ones it destroys. That’s one of the main reasons that we’ve been seeing the steady erosion of middle-class prosperity over the last two decades. This effect will be magnified by the arrival of the World Wide Computer, which is both displacing additional categories of jobs and allowing other jobs to be transferred overseas where they can be performed more cheaply. If the electric utility helped create the vast middle class, t he computing utility may help destroy it.

Second is mass culture. As the power and the reach of the Internet expands, it’s turning into our universal medium - the way we get information and news and entertainment. And because we can “personalize” this medium to an extent that wasn’t possible with, say, newspapers or radio or TV, we’re getting the power to wrap ourselves in our own custom-designed culture, our own tailor-made media cocoon. Now, some argue that this trend is all to the good, that it will give us more choices, more ability to get precisely what we desire. And there’s certainly some truth to that view. But there are other, darker sides to this phenomenon. For all the flaws of the mass media, it helped give diverse people a common sense of identity; it served as a glue for society. That glue is being dissolved, and a lot of the mainstays of our culture, such as the kind of hard journalism that was traditionally done by newspapers, are facing severe economic threats. As I argue in the book, we may end up losing more than we gain.

Even the rules of national security and defense are changing, you argue.

I think most of us have been blissfully unaware of just how vulnerable the Internet is. Just recently, Estonia got hit by a huge, well-coordinated attack over the Internet - what’s called a distributed denial-of-service attack. Many of the country’s governmental and commercial computers ended up paralyzed, and its entire economy was threatened. No one’s quite sure who instigated the attack, but it revealed some of the truly scary risks inherent in today’s Internet. The Net is rapidly turning into the major infrastructure for trade and commerce, and yet it’s an extraordinarily insecure infrastructure. All around the world, national militaries as well as guerrilla forces are creating plans to “fight the Net,” as the U.S. Department of Defense phrased it in a recent report. I sketch out some of the scenarios for what might be called Cold War 2.0 in The Big Switch, and they’re not pretty. The Net has the capacity to bring people together, but it also has the capacity to divide us in ways we haven’t seen before.

You end the book, though, by looking into the more personal implications of the World Wide Computer—how it may alter our identities and even our minds.

Technology changes us. It doesn’t just change what we do. It changes who we are. The modern self, you could argue, came into being about 500 years ago, when the invention of the printing press led to a great flood of inexpensive books and journals and newspapers. It’s hard to overstate the importance of the printed page in shaping who we are, both as individuals and as a society. I think the Internet, as our new universal medium, will have a similarly momentous effect. It will change us. Clicking rapidly between snippets of information, as we do when we’re online, is a radically different way of developing an understanding of the world than we’ve ever experienced in the past. What does it mean for our memory, for our reasoning, for our sense of self? We don’t know yet. But I don’t think the early signs are particularly encouraging. "

"The are way less capital intensive options than fiber optic cable and there is a lot of work being done currently that is not based on fiber optic cables"

Your post came through over fiber cables (and that required a huge capital investment). All google searches and facebook postings run over fiber optic cable as well. I'm not sure what you refer to.

"Capital investments are certainly important and I would not like to see it shrink..." Yet we elected people committed to punishing investment returns and demonizing capitalists - the rich aren't paying their share, aren't doing their patriotic duty, we can tax just the 2% - not us and get free health care, etc.

"...but there is a lot of future growth that does not require a lot of capital investments. Our world is increasing digitized which usually means lower capital costs. Creating Aps for smart phones is being called the next gold rush. It requires very little capital investment."

I think many apps written free by users will likely end up as freeware/shareware, not economic growth. Software engineering is extremely capital intensive. I would put time available of software engineers ahead of copper as the truly scarce resource of this economy. Iphone apps are of no value without the enormous sunken investment of the 3G networks and enormous capital investment still required for the so-called 4G.

"Google and Facebook did not start with large amount of capital investments. Cloud Computing ( Computer technology becoming a Utility ) is reducing costs for starting new businesses."

Maybe you refer to Google as an idea or as a search patent, but google as a money making enterprise requires hundreds of thousands of servers using enormous amounts of electricity. In spite of their 'going green' campaign, the energy they consume is mostly from fossil fuels.

Cloud computing like using salesforce.com is extremely expensive IMO. It is like lease versus purchase of your information systems. Startups still need the capital to pay these services and all their other expenses until their own revenues begin to cover. Punishing capital lessens the likelihood of more success stories like the ones you cite.

The political argument is not for or against new innovations, it is IMO about central planning and control versus a more free economy.

[Jim Lindgren, April 22, 2009 at 1:18am] TrackbacksHigh Unemployment States Have High Income Taxes or High Unionization or Both. As the nation considers increasing marginal tax rates and facilitating greater union membership, I thought it might make sense to look at the states with the highest and lowest unemployment rates to see if there might be any relevant patterns.The six states with the highest unemployment rates are:

12.6% Michigan

12.1% Oregon

11.4% South Carolina

11.2% California

10.8% North Carolina

10.5% Rhode Island

The six states with the lowest unemployment rates are:

5.2% Iowa

5.2% Utah

4.9% South Dakota

4.6% Nebraska

4.5% Wyoming

4.2% North Dakota

In the six states with the highest unemployment rates, the average top state income tax bracket is 8.05%. All but Michigan have marginal tax rates of at least 7% (and Michigan has a very high unionization rate).

On the other hand, the average top tax bracket for the six states with the lowest unemployment is only 4.4%, with 4 of the 6 states having a top marginal rate of 5.54% or less.

Further, union representation averages 14.1% in the six high unemployment states, with a median of 17.4%. All but the Carolinas are among the most unionized states in the nation (and the Carolinas have relatively high marginal income tax rates of 7% and 7.75%).

Putting this together, 3 of the 6 states with the highest unemployment (California, Oregon, and Rhode Island) have both high marginal income tax rates and high union representation. Michigan has high unionization but moderate marginal income tax rates, and the Carolinas have high marginal income taxes, but low unionization rates.

Among the 6 states with the lowest jobless rates, 4 have low unionization rates and no state income tax or modest marginal rates and a fifth (Nebraska) has average income tax rates and low unionization. The exception is Iowa, which has average unionization rates (13%) and high marginal income taxes (8.98%).

I would put less emphasis on my analysis of the LOW unemployment states because they are all in the upper Great Plains. But the HIGH unemployment states are otherwise quite diverse (from the West Coast to New England to the upper Midwest to the Carolinas). What they share are high marginal income taxes or high unionization or both.

As with so many of the reforms contemplated in the budget passed a few weeks ago, we can't know that they will be counter-productive, but the stated goals and the means to achieve those goals do seem to point in opposite directions.

A high-five is due the Special Inspector General for the government's Troubled Asset Relief Program. In his quarterly report to Congress last week, Neil Barofsky promotes a reform to help prevent the next credit disaster.

Mr. Barofsky criticizes the New York Fed's Term Asset-Backed Securities Loan Facility (TALF) for relying on the major credit-rating agencies to determine if securities are safe enough for taxpayers. Under the TALF, the New York Fed provides nonrecourse loans to private firms to buy AAA-rated pools of mortgages and other assets. But can you trust that triple-A rating?

Mr. Barofsky notes that credit ratings on residential mortgage-backed securities (RMBS) "have proven to be unreliable and largely irrelevant to the actual value and performance of the security. Arguably, the wholesale failure of the credit rating agencies to rate adequately such securities is at the heart of the securitization market collapse, if not the primary cause of the current credit crisis." Hear, hear.

Could this message finally penetrate the crania of senior U.S. officials? Mr. Barofsky reports that his office "has been informed by the Federal Reserve that it is considering, but has not yet adopted" a plan to replace credit ratings with actual examinations of the underlying loan portfolios. He further reports that Treasury says that "conducting due diligence with respect to the underlying collateral" will be part of its plan for investing in mortgage-backed securities. Imagine that: Trying to find out what they are buying before committing your money.

So many bad ideas are coming from Washington these days that a rare good one needs more exposure and support. Pour it on, Mr. Barofsky. Taxpayers need a champion, and the financial system needs an alternative to the credit-rating oligopoly.

I tend to get annoyed by articles about how the world is ending, the sky is falling and it will never get better. I dislike economic advice that says keep all you money in cash or better gold, buy lots of guns,ammo and learn how to farm. Learning how to farm etc is not necessarily bad but it is not great economic advice. Huss's article on demographics didn't actually say any of that but it shared some common themes. Maybe the buy gold people are right -- we will see but they do not have a crystal ball and the sad little data we do have is not all bleak.

I was actually not discussing the difference between central planning and market choice. It is not black and white anyway.

"At the University of Chicago, where I went to graduate school, a quote from Lord Kelvin, was carved in stone at the Social Sciences Research Building: When you cannot measure...your knowledge is meager and unsatisfactory. We graduate students took in this credo like mother’s milk. I came out of Chicago with a tremendous confidence in the power of economics and the ability to quantify that power.

But over the years, I have become increasingly skeptical of the power of statistical techniques to measure causation in complex systems. Edward Leamer’s indictment of modern econometrics, “Let’s take the ‘con’ out of econometrics” is the best known critique of our habits as empirical economists but it has not been taken to heart by the profession.

My thoughts on this issue came to a head with my recent podcast with Ian Ayres on his new book SuperCrunchers. The book is about the power of statistics to improve decision-making. And of course, facts and numbers are crucial for making wise decisions. And there are many examples where statistical analysis helps us in our private and political lives to overcome irrational prejudice or bad ideas.

But in the course of preparing for the interview, I realized in a way I hadn’t before, that how we feel about the reliability of statistical results lines up incredibly neatly with our political and ideological biases. One example I use in the podcast is the debate over whether allowing citizens to carry concealed handguns deters crime. John Lott and others say yes and trot out the analysis that proves they're right. Their opponents trot out a different analysis and prove the advocates for concealed carry are wrong.

Now I happen to believe that concealed handguns do deter crime and allowing concealed handguns is a good thing. And you can claim that the evidence that shows I'm right is "good" statistical analysis. The other side disagrees. They claim it's "bad" statistical analysis. Who's right? I have no idea. But what's clear to me is that my belief in the virtues of allowing concealed hand guns has little to do with the empirical evidence. And I would argue that the opponents are really in the same boat. They just don't like guns and they've dressed up their prejudices in fancy statistical analysis.

I came to this realization because Ayres thinks LoJack deters car theft. LoJack is a hidden device you put in your car that lets the police trace your car. Ayres and Steve Levitt found that LoJack has an incredible deterrent effect on car theft. But they think John Lott's work on concealed hand guns is irrevocably flawed. But LoJack is the same thing as a concealed handgun. Ayres and Levitt should like Lott's work and Lott should like Ayres and Levitt. But Lott doesn't like Ayres and Levitt and the feeling is mutual.

It's obvious why neither respects the other. It's not the quality of the empirical evidence. It's just bias. Ayres and Levitt don't like guns and Lott doesn't like the idea that insurance companies (and criminals) could ignore the impact of LoJack if it's really so big. Ayres and Levitt see LoJack as an example of market failure and Lott thinks market failure in this case requires too much ignorance.

The nature of the analysis is such that neither side can convince the other that "their" analysis is reliable. That's not always true. As I suggest in the podcast, Milton Friedman was able to convince the skeptics that inflation is everywhere and always a monetary phenomenon. Friedman won the debate. But how many other studies can you think of where someone staked out a controversial position and convinced the skeptics based on empirical analysis? I think it can be done, but it's rare. And in today's world, most of the interesting empirical claims are being made in cases where the data are too incomplete and the issue is so complex that we can't move to a consensus. The empirical work doesn't improve our understanding of what's going on. It masks what's going on. It gives a patina of science when in effect the numbers aren't really informing the debate.

In the case of crime, to isolate the effect of LoJack or concealed hand guns, you have to control for any other causes of crime and control for the simultaneity problem that causation could be running the other way. I'm not sure that can be done. My other favorite example of this is WalMart. There are economists out there who claim that WalMart lowers wages when it comes to a town, even a big town, such as Los Angeles. I don't find this argument believable. But the proponents of such arguments claim to just be using the numbers to tell them what's going on rather than relying on their prejudices as I am. But the numbers can't be crunched sufficiently well to come to a conclusion on WalMart. To do that, you have to control for a bunch of factors that can't be controlled for in real-world data situations.

And that's why there are studies on the other side showing how great WalMart is for a town. But are we moving toward a consensus about the impact of WalMart? Do the analyses improve our understanding? I don't think so. And that's because of the way modern econometrics is done. Regression is cheap so we buy a lot of it. Leamer's point is that this is "faith-based" empirical work. You just keep running the regressions including or excluding this or that, trying this or that specification until you find the result that confirms your worldview before you started the work.

The pragmatists (Peirce and James) and Hayek understood the dangers of rationality and what is essentially fake science. I'll write more on this another time and maybe do a podcast just on this issue.

I've closed comments here. If you want to comment, please listen to the Ayres podcast at EconTalk and let's talk over there in the comments section to the Ayres podcast."

Rachel, I agree with everything you wrote in this post quoted below. We probably strike the balance in a different place. My comment of central planning vs. market choice was not aimed at you or intended to oversimplify, I just believe we already moved way too far in the wrong direction from my point of view and we want to correct by moving further, so I am referring to direction rather than destination. Sorry about when my posts drift from what started me going to addressing what others may have wrote or said elsewhere. My admitted anti-government bias is really against government doing things other than governing; setting up health plans and running the automakers would be examples.

I strongly favor roads, bridges, libraries, police, fire, snow plowing and national defense. Also level playing field laws like insider trading laws etc. and a far stricter interpretation of equal protection under the law.

Interestingly, many of the free market / supply side economists I read (cf. Brian Wesbury http://www.ftportfolios.com/Common/Rss/CommentaryFeed.aspx and Scott Grannis http://scottgrannis.blogspot.com/) are rather optimistic now even with policies they oppose, not sky is falling or buy gold. They were optimistic up to the fall while most doomsayers were predicting doom throughout the boom period so all we can do is read and sort out our own view. This is nice opportunity here to do that.

I tend to get annoyed by articles about how the world is ending, the sky is falling and it will never get better. I dislike economic advice that says keep all you money in cash or better gold, buy lots of guns,ammo and learn how to farm. Learning how to farm etc is not necessarily bad but it is not great economic advice. Huss's article on demographics didn't actually say any of that but it shared some common themes. Maybe the buy gold people are right -- we will see but they do not have a crystal ball and the sad little data we do have is not all bleak.

I was actually not discussing the difference between central planning and market choice. It is not black and white anyway.

This is the beginning of the end of the world as we know it. No idea how long it will play out, but the fundamentals are fcuked. Anyone can spend their way into a hole that they can't get out of. This is what is happening now on a national scale.

Indeed, an international scale because we are (not for much longer) the world's international currency so other countries print money to match our printing so as to maintain some sort of stability in exchange rates-- net result-- world wide inflation. My guess is that stagflation cometh. His Glibness may be Carter the Second.

It's going to be much worse than anything we saw under Carter. Loose nukes, and rogue states run rampant while US power shrinks into nothing will leave a world future generations will curse us for. At least, those that survive.

WASHINGTON (AFP) — China, wary of the troubled US economy, has already "canceled America's credit card" by cutting down purchases of debt, a US congressman said Thursday.

China has the world's largest foreign reserves, believed to be mostly in dollars, along with around 800 billion dollars in US Treasury bonds, more than any other country.

But Treasury Department data shows that investors in China have sharply curtailed their purchases of bonds in January and February.

Representative Mark Kirk, a member of the House Appropriations Committee and co-chair of a group of lawmakers promoting relations with Beijing, said China had "very legitimate" concerns about its investments.

"It would appear, quietly and with deference and politeness, that China has canceled America's credit card," Kirk told the Committee of 100, a Chinese-American group.

"I'm not sure too many people on Capitol Hill realize that this is now happening," he said.

The Republican lawmaker said that China was justified in concerns about returns from finance giants Fannie Mae and Freddie Mac, which were bailed out by the US government due to the financial crisis.

Kirk said he was the first member of Congress to tour the Bureau of Public Debt, which trades bonds, and was alarmed at how much debt was being bought by the US Federal Reserve due to absence of foreign investors.

"There will come a time where the lack of Chinese participation may have a significant impact," Kirk said.

"We should track that, because up until last month they were the number one provider of currency to the United States and now they're gone."

With China's economy also hit by the global economic crisis, Premier Wen Jiabao has openly voiced concern about the status of his country's investments in the United States.

China has also floated replacing the dollar as the key international currency with a basket of units bringing in the euro, sterling and yen.

THE Rudd Government has acknowledged that the supremacy of the US has begun to fade and Australia is preparing for an uncertain future in which it can no longer rely on the protection of its main ally.

In a fundamental shift in defence plans, the Government has explicitly declared that US primacy in the Asia-Pacific - the bedrock of the nation's security since World War II - may be ending. The change, caused by the rise of new great powers such as China, is set to produce growing regional tensions and a "sudden deterioration" in Australia's security.

A 20-year defence blueprint, to be released by the Prime Minister, Kevin Rudd, today, prepares for a multibillion-dollar build-up of naval and air forces to ensure that Australia can defend its northern and sea approaches.

It says a regional shake-up is under way but US supremacy will not be blunted before 2030 and assesses the chances of an attack on Australia in the short term as "very remote".

The white paper, Defending Australia In The Asia Pacific Century: Force 2030, is the first since 2000 and outlines a range of security threats, including instability caused by the financial crisis, cyber warfare, failed states in the Pacific, Islamist terrorism, weapons of mass destruction, and climate change.

It warns that Australia must ensure it can protect itself amid an emerging range of great powers in the region - particularly China, India and Russia - which could lead to a "miscalculation" with disturbing consequences for Australia.

"Australia has been a very secure country for many decades, in large measure because the wider Asia-Pacific region has enjoyed an unprecedented era of peace and stability underwritten by US strategic primacy," the paper says. "That order is being transformed as economic changes start to bring about changes in the distribution of strategic power. Risks resulting from escalating strategic competition could emerge quite unpredictably."

The Minister for Defence, Joel Fitzgibbon, said the world faced "the beginning of the end" of the unquestioned dominance of Australia's principal ally since the Cold War.

The paper criticises China for failing to explain its substantial military build-up in recent years, which appears to have exceeded the force needed for a war over Taiwan. China's military modernisation will be little affected by the global financial crisis and is set to limit the ability of the US to control the region, it says.

"The pace, scope and structure of China's military modernisation have the potential to give its neighbours cause for concern if not carefully explained, and if China does not reach out to others to build confidence regarding its military plans.

"As other powers rise, and the primacy of the US is increasingly tested, power relations will inevitably change. When this happens there will be the possibility of miscalculation … A potential contraction of US strategic presence in the Asia-Pacific region, with a requirement for allies and friends to do more in their own regions, would adversely affect Australian interests, regional stability and global security."

The paper affirms support for the US alliance and for US-led efforts to bolster global security but warns Australia will not put troops at risk "in distant theatres of war where we have no direct interests".

Instead, the Government has focused on defending the borders of Australia, primarily by building air and naval power to protect the northern sea-air gap, maritime approaches and offshore oil and gas reserves.

A range of large-scale purchases includes a doubling of the submarine fleet to 12, about 100 F-35 Joint Strike Fighters, eight frigates with submarine detection capability and - as planned - three air warfare destroyers. For the first time Australia will acquire an arsenal of sea-based long-range cruise missiles.

"The ability to deter or defeat armed attack on Australia will continue to be the primary force structure determinant … This means focusing predominantly on forces that can exert air superiority and sea control in our approaches."

The Government has kept its commitment to boost the Defence budget by 3 per cent each year until 2018, but plans to scale this back to 2.2 per cent until 2030.

This is the beginning of the end of the world as we know it. No idea how long it will play out, but the fundamentals are fcuked. Anyone can spend their way into a hole that they can't get out of. This is what is happening now on a national scale.

Just like World War 2 ? I'm not saying the war necessary ended the Great Depression but where is your data?

March 16, 2009The Obama Budget: Spending, Taxes, and Doubling the National Debtby Brian M. RiedlBackgrounder #2249During his presidential campaign, President Barack Obama promised the American people a "net spending cut."1 Instead, he signed a "stimulus" bill that spends $800 billion, and he has proposed a budget that would:

Increase spending by $1 trillion over the next decade;Include an additional $250 billion placeholder for another financial bailout;Likely lead to a 12 percent increase in discretion ary spending;Permanently expand the federal government by nearly 3 percent of gross domestic product (GDP) over pre-recession levels;Raise taxes on all Americans by $1.4 trillion over the next decade;Raise taxes for 3.2 million taxpayers by an average of $300,000 over the next decade;Call for a pay-as-you-go (PAYGO) law despite offering a budget that would violate it by $3.4 trillion;Assume a rosy economic scenario that few econo mists anticipate;Leave permanent deficits averaging $600 billion even after the economy recovers; andDouble the publicly held national debt to over $15 trillion ($12.5 trillion after inflation).2Before the recession, federal spending totaled $24,000 per U.S. household. President Obama would hike it to $32,000 per household by 2019— an inflation-adjusted $8,000-per-household expan sion of government. Even the steep tax increases planned for all taxpayers would not finance all of this spending: The President's budget would add trillions of dollars in new debt.[1][2]

Yet, the President's budget may even understate future spending and deficits. It assumes that the temporary stimulus spending provisions will be allowed to expire and that the $634 billion down payment on universal health care will not be expanded. It proposes destructive income tax increases and a new cap-and-trade energy tax that could devastate the manufacturing sector. Yet, somehow, the budget assumes much faster eco nomic growth than forecast by the Congressional Budget Office (CBO) and the Blue Chip Consensus.

Overall, the President's budget represents a sharp break from the policies that created the most prosperous 25-year period in American economic history. Instead, it puts politicians in charge of an increasing portion of the economy. Congress should discard this tax-and-spend budget and start from scratch.

Doubling Down on President Bush's Economic Policies

President Obama has framed his budget as a break from the "failed policies" of the Bush Admin istration. Actually, his budget doubles down on President George W. Bush's borrow, spend, and bail out policies. For example:

President Bush expanded the federal budget by a historic $700 billion through 2008. President Obama would add another $1 trillion.[3]President Bush began a string of expensive finan cial bailouts. President Obama is accelerating that course.[4]President Bush created a Medicare drug entitle ment that will cost an estimated $800 billion in its first decade. President Obama has proposed a $634 billion down payment on a new govern ment health care fund.President Bush increased federal education spending 58 percent faster than inflation. Presi dent Obama would double it.[5]President Bush became the first President to spend 3 percent of GDP on federal antipoverty programs. President Obama has already in creased this spending by 20 percent.[6]President Bush tilted the income tax burden more toward upper-income taxpayers. President Obama would continue that trend.[7]President Bush ran budget deficits averaging $300 billion annually. After harshly criticizing Bush's budget deficits, President Obama pro­posed a budget that would run deficits averaging $600 billion even after the economy recovers and the troops return home from Iraq.

The President's tax policy is the only sharp break in economic policy. President Bush reduced taxes by approximately $2 trillion; President Obama has proposed raising taxes by $1.4 trillion. In doing so, President Obama has rejected the most successful Bush fiscal policy. In the 18 months following the 2003 tax rate cuts, economic growth rates doubled, the stock market surged 32 percent, and the econ omy created 1.8 million jobs, followed by 5.2 mil lion more jobs in the next 27 months.[8] Not until the housing bubble burst several years later did the economy finally lose steam. Pro-growth lawmakers should embrace tax relief policies that have proven successful, while rejecting the runaway spending that has been business as usual in Washington.

The Mythical "$2 Trillion in Savings"

During his recent address to a joint session of Congress, President Obama previewed his budget by asserting that the Administration has "already identified $2 trillion in savings over the next decade."[9] This is simply not true. His budget increases spending by $1 trillion over the next decade, which he attempts to offset by reclassifying as "savings" $1.4 trillion in tax increases and $1.5 trillion in reduced spending in Iraq. However, gov ernment savings have always referred to spending cuts that save taxpayer dollars, not tax increases that feed the government. Furthermore, the Iraq "sav ings" are measured against an implausible spending baseline that assumes a permanent $180 billion bud get for the global war on terrorism, without any troop withdrawals through 2019. This is the equiv alent of a family deciding to "save" $10,000 by first assuming an expensive vacation and then not taking it. Without these false savings, only the $1 trillion spending hike remains, and that does not account for the extra $250 billion proposed for another round of financial bailouts in the current fiscal year.

Despite the claimed savings, this budget undeni ably expands government. Before the recession, rev enues were 18 percent of GDP and spending was 20 percent. After the recession, President Obama would maintain revenues slightly above 19 percent of GDP and spending at over 22 percent.[10] Thus, new tax revenues would finance new spending, rather than deficit reduction. President Obama's structural bud get deficit would exceed President Bush's.

The President also calls for bringing back the PAYGO statute, which existed from 1991 through 2002. Under this law, if the sum of a given year's entitlement or tax legislation expanded the budget deficit, an automatic across-the-board cut ("seques tration") in entitlement spending would be trig gered at the end of the year. The President's PAYGO proposal lacks credibility because his own budget blueprint would violate PAYGO by $3.4 trillion over 10 years.[11]

This disconnect between PAYGO rhetoric and reality is nothing new: Congress violated the 1991– 2002 PAYGO law by more than $700 billion and then enacted legislation cancelling every single sequestration that would have enforced the law.[12] Although Congress created its own PAYGO rule in 2007, it has waived it several times at a cost of $600 billion. Conse quently, the President's PAYGO pro posal should be considered a hollow gimmick that will be bypassed any time it proves inconvenient.

Doubling the National Debt

President Obama's pledge to halve the budget deficit by 2013 is hardly ambitious. The budget deficit will quadruple in 2009 to $1.75 trillion, and cutting that level in half would still leave deficits twice as high as under President Bush. Furthermore, three expected developments—the end of the recession, withdrawal of troops from Iraq, and phaseout of temporary stimulus spending— would halve the budget deficit by 2013. The President's budget shows deficits averaging $600 billion even after the economy recovers and the troops return home from Iraq.[13] That is not good enough.

President Bush presided over a $2.5 trillion increase in the public debt through 2008. Setting aside 2009 (for which Presidents Bush and Obama share responsibility for an additional $2.6 trillion in public debt), President Obama's budget would add $4.9 trillion in public debt from the beginning of 2010 through 2016— nearly double the amount accumulated under Pres ident Bush over the same number of years. Overall, the public debt level would double over the next decade to $15.4 trillion ($12.5 trillion in inflation-adjusted dollars). (See Chart 1.) At 67 percent of GDP, this would constitute America's largest debt burden since immediately following World War II.[14]

The demise of Lehman Brothers, Merrill Lynch, and Bear Stearns this year has investors contemplating the long-term outlook for other once-venerable institutions, including Dow members Citigroup, AIG and Bank of America.

But there's an even bigger financial institution with greater debt and an increasing level of bad loans on its books: The U.S. government.

Given the actions already taken, from the Housing Bill to the nationalization of Fannie Mae and Freddie Mac, the U.S. deficit could double to $800 billion in two years, says Nouriel Roubini, of NYU's Stern School and RGE Monitor. (Even worse, the official government deficit figures exclude the costs of the wars in Iraq and Afghanistan, as well as the unfunded liabilities of Social Security and Medicare.)

The big risk is that foreign holders of Treasuries will no longer accept low interest rates to help fund U.S. debt spending, says Roubini, noting countries like China, Russia and oil-producing nations in the Middle East have becoming increasingly important holders of Treasuries. Should they demand higher rates to hold U.S. debt or, worse, dump their holdings, it could have profound ramifications on the U.S. economy and the value of the dollar.

Roubini further notes the Federal Reserve has put its balance sheet -- and independence -- at risk via its intimate involvement in thus-far failed attempts to stem the crisis.

It's tempting to dismiss the notion of a "run" on the U.S. government as unthinkable and some bears have been warning for years, even decades, about such a worst-case scenario. But after the events of this weekend, much less the past six months, it's clear that (almost) anything is possible and no scenario too "outrageous" to seriously contemplate.

INDIANAPOLIS, Ind. -- The Bush administration has jeopardized national security and the ability to intervene in world crises because of the huge U.S. debt held partly by China, Democratic presidential hopeful Hillary Clinton said on Saturday.The New York senator, who argues she is better prepared to deal with economic and foreign policy problems than rival Illinois Sen. Barack Obama, told a rally in Indiana that the United States' US$9 trillion in gross national debt puts it at the mercy of other nations.

She said President George W. Bush's policies contributed to rising U.S. debt and also have hamstrung Washington's ability to lead.

"That is what George Bush's policies mean in real world terms -- that we have put our nation's security and our leadership of the world at risk because of this indebtedness," Clinton said.

Clinton made China the focus of her criticism, which she has repeated throughout Indiana, a state that has suffered from manufacturing job losses that many blame on unfair trade practices and companies outsourcing jobs to China.

Clinton hopes to win Indiana's Democratic nominating contest on May 6 in a bid to close the gap with Obama who leads in amassing delegates who determine the party's nominee.

In her campaign remarks, she lamented China's hold over the U.S. economy.

"We are so dependent upon decisions made in other countries' capitals," Clinton said, singling out China's potential power over U.S. foreign policy decisions because of its financial leverage.

Clinton cited a discussion she had with a retired general who raised a "nightmare scenario" in which China threatened Taiwan and the U.S. president wanted to send ships toward the island to ward off Beijing.

"He said, 'You know, suppose the Chinese decide that they're going to go after Taiwan the way we see them, you know, with Tibet,'" Clinton said, describing the general's remarks and referring to the recent unrest in Tibet.

"'We start to move the fleet, and the Chinese say, 'Fine. You do that, we will dump your dollars. We will flood the market. We will not buy any more of your debt.'"

China currently holds about US$490 billion in U.S. Treasury securities and has foreign exchanges reserves totaling more than US$1.5 trillion.

Clinton accused Beijing of manipulating its currency and of not holding its exporters to the same health and environmental standards that U.S. companies must meet.

The U.S. trade deficit with China soared last year to a record US$252 billion even as the U.S. trade gap with the rest of the world decreased.

Many U.S. lawmakers complain that China deliberately undervalues its currency to boost exports and limit imports and have pressed Bush to be more aggressive in addressing the issue.

When Defense Secretary Robert Gates recently unveiled his new military spending plan, supporters hailed it as “revolutionary.” But others are suggesting that Mr. Gates’ proposal is not only shortsighted; it potentially jeopardizes American security. With steep cuts in weapons systems—including missile defense—the Gates budget was described as a “break” with long-standing Pentagon procurement and contracting practices, which have produced revolutionary technology, but at a very steep price. Cost overruns and design changes have added billions to the cost of new weapons systems—including many targeted for deep cuts or elimination by Mr. Gates. : Programs on the chopping block include five deemed essential for the U.S. Air Force, and its ability to project airpower around the globe. Under the Gates plan, production of the service’s state-of-the-art F-22 fighter would be capped at 187 aircraft, well below what the Air Force requested.

Additionally, the new budget would eliminate funding for the service’s new rescue helicopter, and halt development of the next-generation bomber and the airborne laser, which targets ballistic missiles in their boost phase. Procurement of the C-17 transport would also end.

While the Gates budget also slashes weapons programs in the other services, one respected defense analyst believes it places an undue burden on the Air Force. Dr. Rebecca Grant, a senior fellow at the Washington-based Lexington Institute says the new defense plan “singles out” the USAF for deep cuts, by halting or eliminating key programs needed for joint war plans.

The result, she says, will be an Air Force that finds it more difficult to deal with advanced threats--and meet the needs of combatant commanders.

As an example of the budget’s adverse impact, Grant cited the decision to shut down the F-22 assembly line after producing just four additional Raptors. beyond those now on order. At one point, the Air Force hoped to buy over 700 F-22, but prior budget cuts forced dramatic reductions in that plan. Earlier this year, service leaders made a push for 60 additional Raptors, which would have raised the inventory to just over 240 aircraft. But Mr. Gates rejected that request.

Dr. Grant says halting F-22 procurement will have far-reaching consequences, in a variety of potential contingencies. She expressed doubt that the Air Force will be able to fully equip a Raptor squadron earmarked for the Hawaii Air National Guard, despite the aircraft’s prominent role in Pacific region war planning.

She also faulted the Defense Secretary for his plan to buy more Joint Strike Fighters instead of the F-22. “He accepted the analysis of his own staff over Air Force warfighters, Grant observed. “He said he wants the 75% solution that JSF provides, but JSF can’t do all the F-22 missions. It complements the F-22 but does not replace its speed and survivability.”

Dr. Grant believes that a smaller Raptor inventory will make it more difficult to deal with a variety of crises, ranging from the SA-20 air defense system in Iran, to “worst case” scenarios involving China, or a conflict along Russia’s borders.

She also suggested that the JSF faces a less-than-certain future, despite Gates’ endorsement. “He didn’t significantly accelerate the program,” Grant continued, “and there’s still the Quadrennial Defense Review (QDR) to come. He has given us no vision of future military forces.”

The Air Force’s long-range strike capabilities took an even greater hit under the Gates proposal, which ends development of a new bomber. Dr. Grant said that cancellation of the program would mean an even greater reliance on the B-2 stealth bomber, which entered operational service in the 1990s.

“If the U.S. had to go after a difficult, long distance target like a hostile missile launcher, only 4-5 B-2s would be available on any given day,” she predicted. Without a new bomber, Grant said that U.S. strategic forces face a “tough environment,” particularly after 2020, when the oldest B-2s will enter their fourth decade of service.

She also wondered if “Gates wants to leave airmen behind on the battlefield,” referring to his termination of the next-generation combat search-and-rescue helicopter, or CSAR-X. The defense secretary defended his decision in a recent appearance at the Air War College, claiming that the chopper’s mission requirements—rescuing personnel deep in enemy territory—“made no sense.”

While Gates plans to boost spending for certain systems, including UAVs, Dr. Grant warned that drones are no substitute for aircraft being cancelled, including the F-22 and the new bomber. “UAVs are great,” she said, “but they can’t survive in hostile airspace.” She also noted that one variant of the planned bomber would have been unmanned. Terminating the program “shuts down another key technology path,” Grant said.

As the defense chief makes the rounds of media appearances and war colleges to sell his proposal, there has been little criticism from the service chiefs and other senior, uniformed officers. Grant believes the lack of pushback is hardly a coincidence.

“He’s fired a service chief, two service secretaries and a combatant commander. Generals and admirals are afraid to speak in the climate created by Gates.” Dr. Grant also noted that Secretary Gates has required senior service officials to sign non-disclosure agreements, stifling dissent in the senior ranks.

The Gates plan faces stiffer opposition on Capitol Hill, where lawmakers are maneuvering to preserve programs targeted for elimination. “No way will the Senate go along with all of his recommendations,” predicted one Republican staffer.

But it’s still unclear which weapons systems—if any—will survive the process. Earlier this year, a bi-partisan group of Senators sent Mr. Gates a letter, asking him to continue F-22 production. But the defense secretary ignored their advice, and a plea from the Air Force Chief of Staff, General Norton Schwartz, and the service secretary, Michael Donley, for 60 additional aircraft.

An early showdown on the secretary’s proposal is expected on April 30th, when the Airland Subcommittee of the Senate Armed Services Committee holds a scheduled hearing on airpower. Supporters of the next-generation bomber are expected to raise that issue during the hearing, and the Senate aide says that continued development of that aircraft is a “high priority” for members of the subcommittee.

"Huge deal that this is, I believe it understates the number-- and we need to remember that health care is about 15% of GDP. Put the two together and we are looking at the feds being about 40% of GDP."

And then add in 'Government Motors' and the impending takeover of the energy sector... Luckily you don't have a large state government also. ---

Of course she had it exactly upside down. The fact they are invested in the U.S. may be our only security after Obama-Pelosi unilaterally disarm us. ---

Couple of months ago I posted: "the only check/balance on the American Left machine is 'Communist China'. If they stop buying our debt, we will have to cut spending by most of the $10 trillion (and eat the rest as inflation) even without the participation in the process of Republicans."

With the Specter jump and Al Franken likely, China's unwillingness to buy more debt has become the 41st senator. As with other debt ridden third world countries, they may require some restructuring and discipline before agreeing to a 'bailout'. Hopefully they will also impose their lower business tax rates on us as part of any agreement.

At this point I would rather see Obama inflate than borrow on that scale. Then maybe we can muster up the political will to spend less.

The Treasury released its bank "stress test" results late yesterday, and the good news is that the financial system has survived this very public undressing better than most analysts figured three months ago. We'd attribute the results much more to Adam Smith's continuing workout than to this public strip-tease, but we'll take relief wherever we can get it.

APStress-testing is what banks and their regulators are supposed to do as a matter of course, albeit more quietly. The current very loud and public effort was advertised to provide an extraordinary measure of transparency at a time when no one trusted bank books. Do markets trust them any better now? Judging by the run-up in bank stock prices from their oversold levels in January, they do. This is progress.

On the other hand, all we really have to go on is the word of the federal employees who looked at the banks and estimated their losses against certain economic assumptions. Did they go easier than they might have, and how much did they bend when the banks fought back? The Fed's overview yesterday claimed they ran a "deliberately stringent test" and pegged potential "adverse"-case losses at the 19 largest banks at $600 billion this year and next.

Yet markets are also full of reports that regulators showed more than a little forbearance, especially after it became clear that President Obama had no desire to go back to Congress to ask for more public money. With only $110 billion or so in Troubled Asset Relief Program (TARP) funds left uncommitted, it's probably no coincidence that Treasury now sees new net bank capital needs as a manageable $75 billion.

And maybe that optimism will prove correct. Most banks are earning healthy profits again, thanks to a low cost of funds and steep yield curve. They're also taking steps to burn bad debt and clean up their balance sheets. Some banks that got too big during the boom are looking to sell some of their operations in order to raise cash. This is how a financial system shapes itself up under the market pressure of recession, with or without stress tests.

Not that there still aren't plenty of financial risks out there. On the credit side, commercial real estate is ugly and both home mortgage and credit card losses are a long way from receding. While the economy seems to be bottoming out at last, unemployment will keep rising for several months, which will mean more bank losses.

But our biggest question concerns interest-rate risk. Thanks to the Federal Reserve's emergency easing, short-term rates are close to zero. That can't last forever, and the longer the Fed keeps rates this low the more likely it is that rates will have to climb higher down the road to prevent inflation. Remember how the Fed's 1% rate of 2003-2004 rose to 5.25% by 2006 and what that did to housing prices and the cost of bank funds? Yet the Fed didn't disclose the interest-rate projections for 2010 and beyond that it built into its stress test models.

On the interest-rate point, by the way, one omen was yesterday's terrible 30-year Treasury bond auction. Treasury sold $14 billion of the securities, but investors demanded yields in mid-auction that were higher than forecast and bond prices fell the most since February. The 30-year yield hit 4.3%. With trillions of dollars in budget deficits still in the pipeline -- even before health care -- Treasury may find the world keeps demanding higher yields to offset the fear of potential inflation. Fed Chairman Ben Bernanke didn't help on that score this week when he told Congress that it was too early to take liquidity out of the financial system because the economy was still too weak. By the time the economy is growing, it will be too late. Think 2004, again.

In the wake of the stress tests, the weaker banks will now have six months to raise private capital to fill the hole identified by Treasury. They'll be desperate to do so, because the alternative is that Treasury will force them to accept more public capital. This will include the conversion of Treasury's preferred stock, bought last year via the TARP, into common shares.

Under accounting rules, this gives the banks more "tangible common equity," the measure of capital favored by Treasury. Yet it provides not a penny more in actual capital to absorb losses. Meantime, the feds would suddenly own big chunks of those banks via common stock, the way they now are the largest shareholder in once-proud Citigroup. We've called this a back-door nationalization, and it means Congress looking over banker shoulders. The silver lining is that bank executives are now so appalled by this idea that they'll sell anything that moves to avoid such a fate.

As for the "stronger" banks, a major goal will be to flee as fast as possible from the TARP, also known as the Hotel Geithner. Banks can check in but it's a lot harder to check out. Treasury has set up major hurdles before a bank can escape, even if it wants to. Clearly banks at risk of failing can't be allowed to endanger the larger financial system, but banks that have adequate capital shouldn't be held hostage to the political worries of regulators.

The best that can be said about the stress tests is that they're over. Now the most urgent task is to get back to a financial system free of government guarantees, public capital and political control.

So, here is my question. If the economy is on the way to recovery why does the FDIC need a new office with 500+ new employees in Georgia whose specific task will be "to manage receiverships and to liquidate assets from failed financial institutions" ? Keep in mind the office wont be up and running until sept which is still 5 months away and they will only be serving the south east. what do they know that we dont?

FDIC to Open a Temporary Satellite Office, Jacksonville Office will Assist with Bank Closings

The Federal Deposit Insurance Corporation (FDIC) today announced it will open a temporary satellite office in Jacksonville, Florida, to manage receiverships and to liquidate assets from failed financial institutions primarily located in the eastern states.

After conducting a competitive leasing acquisition process, the FDIC entered into a short-term agreement to lease space at 7777 Baymeadows Way in Jacksonville. The decision was based on mission needs and workload.

The new office will provide facilities for up to 500 nonpermanent staff and contractors. Staffing will be based on the workload needs of this office, based on the number of closings in the eastern states, the resulting number of receiverships, and the post-closing workload.

Throughout its history, the FDIC has used these offices to keep temporary asset resolution staff closer to the concentration of failed bank assets they oversee. As the work diminishes, the temporary satellite offices are closed.

The FDIC expects to gradually move into the space starting in mid-September 2009

What a great question, Huss wrote: "If the economy is on the way to recovery why does the FDIC need a new office with 500+ new employees in Georgia whose specific task will be "to manage receiverships and to liquidate assets from failed financial institutions" ? Keep in mind the office wont be up and running until sept which is still 5 months away and they will only be serving the south east. what do they know that we dont?"

I don't know the answer. My guess is that they build government buildings and hire hundreds because they can, probably stimulus and TARP money. If the recession bottomed, we are probably in for shaky and lethargic growth at best as the investor class is aware of an unprecedented amount of uncertainty going forward.

I posted that economist Brian Wesbury recently headlined a post 'the recession is over, no more shoes to drop' but we need a bunch of qualifiers on that. Headlines of scientists and economists are usually overblown. Click on the link, see the data, read the analysis and remember that the best forecasters don't really know the future. 'No more shoes to drop' he means we already know about the collapses of transportation, energy, housing, banking, insurance, release of terrorists, etc. etc. We are not exactly sitting on the grassy knoll looking at the shining city on the hill. Disposing of the so-called bad assets and trying to recover some value will be a major industry for some time to come. At least in the case of FDIC, most people might agree there was some proper role for government, more so than taking over the automakers, insurance companies or the healthcare sector anyway.

Here is my prediction. Recession I in this series is over and Recession II begins the day Obama and Pelosi ramp up their next attack on the private sector. They seem to be delaying tax hikes on the wealthy - I wonder why? Not because they know higher rates destroy economic growth I don't suppose. But in June - next month - I wouldn't be surprised if the House of Representatives passes both a version of socialized health care and a version of CO2 cap, trade, tax and ban.

Those two freedom and enterprise killing bills along with the impending expiration of previous tax cuts should be enough to set off some kind public reaction as well as investor reaction. They will go a little slower in the senate. Red state Democrats will measure the uproar and the downturn and stake out their positions. In committee we will decide more about the future about this country than we decided with the constitution and the Revolutionary war combined. I hope I didn't understate the importance of stopping this train wreck.

In any case the next downturn is on Obama's watch and we will see how smoothly this smart man with a gift can transition our economy into communism or rescue his own career by flip flopping on his own key issues and pulling these proposals back off the table at least for a spell.

Fannie Mae to Tap $19 Billion in Treasury CapitalMay 8 (Bloomberg) -- Fannie Mae, operating under a federal conservatorship, asked the U.S. Treasury for a $19 billion capital investment and raised the possibility that its long-term survival may be dependent on continued government funding. Fannie Mae, which took $15.2 billion in aid on March 31, cited the “unprecedented” housing market slump and government- mandated programs that are creating “conflicts in strategic and day-to-day decision making,” according to company filings today with the Securities and Exchange Commission.http://www.bloomberg.com/apps/news?pid=20601087&sid=aR_Lf2hl0TJU

"Ruminations on the Latest Unemployment Figures from the Bureau of Lies and Statistics" The unemployment figures just released by the Bureau of Labor Statistics are totally cosmetic: We lost a whole lot more than 531,000 unemployed.

First, the "seasonal adjustment", which is a black box that can tweek me into looking like Dumbo the flying elephant. They're knocking off ±65,000 workers for no clearly discernible reason.

Second, notice that the Census Bureau hired 60,000 people last month. Those workers (by definition) are temporary, and are a net cost to the economy, as they will not be adding marginal utility to any economic sector, the census being merely a social expenditure.

How does the Obama Administration plan to save money? If you guessed "cutting defense," give yourself a gold star and move to the head of the budgetary class.

The Wall Street Journal reports that defense programs will absorb half of the $17 billion in planned cuts, which will be announced on Thursday. Some of the reductions have already been announced, including plans to halt production of the Air Force's F-22 stealth fighter.

The rest of the cuts will come from domestic programs, although it's unclear if the reductions will actually occur. As one administration official told the Journal, virtually all programs have a constituency, meaning that someone will fight the planned reductions.

Not that it really matters. The reductions are largely symbolic, as the WSJ explains:

Compared with the total $3.6 trillion spending plan for 2010, the proposed trims amount to one-half of 1%. Half the cuts would come from defense, especially Pentagon weapons programs already spelled out by Defense Secretary Robert Gates, such as trimming back the fleet of advanced F-22 fighter planes. The other half would come from programs that have strong support among progressive activists who cheered Mr. Obama's election. Programs targeted for elimination or consolidation include education and housing programs that Democratic aides said will have fierce advocates among traditionally Democratic constituencies.

Given that reality, it's not inconceivable that some of the domestic initiatives will be saved, forcing bean counters to look for more cuts in the defense budget. So the "50% share" for the Pentagon may well rise, as the administration looks for more ways to save money.

OMB Director Peter Orszag says the planned defense reductions include "all of those" outlined by Defense Secretary Bob Gates last month. Programs targeted for down-sizing (or elimination) include the C-17 transport, the airborne laser and the aforementioned F-22. Some analysts believe that the Air Force has been unfairly singled out for budget cuts, with ominous implications for the service and its airpower mission.

But those sorts of arguments don't get much traction. Just today, pollster Frank Luntz advised Republicans to avoid "principled arguments" in battling the White House on health care reform. Embrace the reform mantra, Luntz argued, and advocate efficiency and savings in the GOP plan.

If you can't get American voters to see the folly of socialized health care, then well-reasoned arguments supporting key defense programs stand absolutely no chance. Welcome to the ill-informed, indifferent U.S. electorate of the early 21st Century. The greatest of the "Great Unwashed." Just the kind of voters that Democrats love.

How does the Obama Administration plan to save money? If you guessed "cutting defense," give yourself a gold star and move to the head of the budgetary class.

The Wall Street Journal reports that defense programs will absorb half of the $17 billion in planned cuts, which will be announced on Thursday. Some of the reductions have already been announced, including plans to halt production of the Air Force's F-22 stealth fighter.

The rest of the cuts will come from domestic programs, although it's unclear if the reductions will actually occur. As one administration official told the Journal, virtually all programs have a constituency, meaning that someone will fight the planned reductions.

Not that it really matters. The reductions are largely symbolic, as the WSJ explains:

Compared with the total $3.6 trillion spending plan for 2010, the proposed trims amount to one-half of 1%. Half the cuts would come from defense, especially Pentagon weapons programs already spelled out by Defense Secretary Robert Gates, such as trimming back the fleet of advanced F-22 fighter planes. The other half would come from programs that have strong support among progressive activists who cheered Mr. Obama's election. Programs targeted for elimination or consolidation include education and housing programs that Democratic aides said will have fierce advocates among traditionally Democratic constituencies.

Given that reality, it's not inconceivable that some of the domestic initiatives will be saved, forcing bean counters to look for more cuts in the defense budget. So the "50% share" for the Pentagon may well rise, as the administration looks for more ways to save money.

OMB Director Peter Orszag says the planned defense reductions include "all of those" outlined by Defense Secretary Bob Gates last month. Programs targeted for down-sizing (or elimination) include the C-17 transport, the airborne laser and the aforementioned F-22. Some analysts believe that the Air Force has been unfairly singled out for budget cuts, with ominous implications for the service and its airpower mission.

But those sorts of arguments don't get much traction. Just today, pollster Frank Luntz advised Republicans to avoid "principled arguments" in battling the White House on health care reform. Embrace the reform mantra, Luntz argued, and advocate efficiency and savings in the GOP plan.

If you can't get American voters to see the folly of socialized health care, then well-reasoned arguments supporting key defense programs stand absolutely no chance. Welcome to the ill-informed, indifferent U.S. electorate of the early 21st Century. The greatest of the "Great Unwashed." Just the kind of voters that Democrats love.

Huss, I don't disagree with your point that this mess is not over. Would just add to points on econ stats: Unemployment tends to be a trailing indicator and that large job layoffs get widely publicized and hirings rarely do.

On another point, it is amazing that we have come to a point where 17 billion is chump change. If I could every man, woman and child to pay in a full dollar to support a fund, I would raise only $300 million. If I could get a full dollar from everyone who really makes any money, we are down to about $100 million. 17 Billion is 170 times that amount and still a drop in the bucket. The near term spending that needs to be cut is about $10 Trillion. To do any part of that we need to change our view government. Too bad the view of the founders is so out of date.

correct me if im wrong, but the chart indicates the U.S will be over 10 trillion in the hole at the end of 10 years. A couple questions;1- the current numbers are based on recovery starting this year which gives the govt increasing tax revenue. Most say recovery this year or even next year is unlikely. How do those numbers look if the slide continues.2- Based on the "borrowing .50 of every dollar spent". who is going to lend the U.S 5 trillion additional dollar? considering the fed is buy u.s govt debt right now..............3- what will happen to the U.S dollar if it is replaced as the reserve currency? what will this do to their buget projections. The IMF is already issuing reserve notes that are not linked to the U.S dollar.

I have a feeling the that chart is the best case senario and that any of the above will cause escalating layoffs and job loss which will result in further borrowing for social programs, which will result in the printing of money, which will result in inflation.

It's official: The government in Beijing has announced that the Yuan can now be used in international trade. Their mouthpiece for this occasion was the Industrial and Commercial Bank of China, a private entity, which made the announcement on their behalf. By the end of this year, it is expected that fully 50% of all transactions with Hong Kong will be denominated in the Yuan. In turn, Hong Kong re-exports 90% of its Chinese imports. Importer #1 is the European Union; importer #2 is the United States. Some of these countries may soon find themselves hard-pressed to earn enough Yuan to continue importing Chinese-made products.

This is only the next small step in Beijing's "policy of small steps." Already the Chinese government has ramped down its purchases of US Treasury paper, forcing the Federal Reserve to step in as the buyer of last resort. The IOU, with which the US has inundated the world, is now becoming the I-owe-me - which is not quite as impressive to those who are considering selling products to the US on credit. Instead of the funny paper, the Chinese government has started to buy up gold on the international market. The Yuan has long been in de facto use in Hong Kong, Sigapore, Kuala Lumpur, and other countries in the region, in preference to the US Dollar. In several countries it is already possible to have Yuan-denominated savings and checking accounts; in Hong Kong alone such accounts are set to exceed US$100 billion by the end of this year.

The United States and Europe have recently demonstrated their unwillingness to grant other countries a greater say in the IMF and the other organizations that govern international finance. Now Beijing can turn this combination of weakness and recalcitrance to its advantage, by quickly creating a wide coalition of countries that wish to isolate themselves from the financially untrustworthy regions of Europe and America. This is but one of many developments that those who are predicting economic recovery in the US sometime next year have chosen to ignore, but it may turn out to be one of the more important ones.

What do these major shifts in international finance portend for us mere private citizens? The implication is simple: if you think that you still have some money, let's hope that you don't mean that you have something or other denominated in the US Dollar. Or that you just wrote yourself an I-owe-me.

The barrage of tax increases proposed in President Barack Obama's budget could, if enacted by Congress, kill any chance of an early and sustained recovery.

Martin KozlowskiHistorians and economists who've studied the 1930s conclude that the tax increases passed during that decade derailed the recovery and slowed the decline in unemployment. That was true of the 1935 tax on corporate earnings and of the 1937 introduction of the payroll tax. Japan did the same destructive thing by raising its value-added tax rate in 1997.

The current outlook for an economic recovery remains precarious. Although the stimulus package will give a temporary boost to growth in the current quarter, it will not be enough to offset the combined effect of lower consumer spending, the decline in residential construction, the weakness of exports, the limited availability of bank credit and the downward spiral of house prices. A sustained economic upturn is far from a sure thing. This is no time for tax increases that will reduce spending by households and businesses.

Even if the proposed tax increases are not scheduled to take effect until 2011, households will recognize the permanent reduction in their future incomes and will reduce current spending accordingly. Higher future tax rates on capital gains and dividends will depress share prices immediately and the resulting fall in wealth will cut consumer spending further. Lower share prices will also raise the cost of equity capital, depressing business investment in plant and equipment.

The Obama budget calls for tax increases of more than $1.1 trillion over the next decade. Official budget calculations disguise the resulting fiscal drag by treating Mr. Obama's proposal to cancel the 2011 income tax increases for taxpayers with incomes below $250,000 as if they are real tax cuts. The plan to modify the Alternative Minimum Tax to avoid increases for some taxpayers is also treated as a tax cut.

But those are false tax cuts in which no one's tax bill actually declines. In contrast, the proposed tax increases are very real. And despite the proposed tax increases, the government's new spending and transfer programs would cause the annual budget deficit in 2019 to exceed $1 trillion, or 5.7% of GDP.

Mr. Obama's biggest proposed tax increase is the cap-and-trade system of requiring businesses to buy carbon dioxide emission permits. The nonpartisan Congressional Budget Office (CBO) estimates that the proposed permit auctions would raise about $80 billion a year and that these extra taxes would be passed along in higher prices to consumers. Anyone who drives a car, uses public transportation, consumes electricity or buys any product that involves creating CO2 in its production would face higher prices.

CBO Director Douglas Elmendorf testified before the Senate Finance Committee on May 7 that the cap-and-trade price increases resulting from a 15% cut in CO2 emissions would cost the average household roughly $1,600 a year, ranging from $700 in the lowest-income quintile to $2,200 in the highest-income quintile. Since the amount of cap-and-trade tax rises with income, the cap-and-trade tax has the same kind of adverse work incentives as the income tax. And since the purpose of the cap-and-trade plan is to discourage the consumption of CO2-intensive products, energy or means of transportation by raising their cost to consumers, the consumer-price increases would be the same for a 15% reduction in C02 even if the government decides to give away some of the CO2 emissions permits.

But while the cap-and-trade tax rises with income, the relative burden is greatest for low-income households. According to the CBO, households in the lowest-income quintile spend more than 20% of their income on energy intensive items (primarily fuels and electricity), while those in the highest-income quintile spend less than 5% on those products.

The CBO warns that the estimate of an $80 billion-a-year tax increase could be significantly higher or lower, depending on how the program is designed. The Waxman-Markey bill currently before Congress calls for reducing greenhouse gasses 20% by 2020 and by an incredible 83% by 2050. As the government reduces the amount of CO2 that is allowed, the price of the CO2 permits would rise and the pass-through to consumer prices would also increase.

The next-largest tax increase -- with a projected rise in revenue of more than $300 billion between 2011 and 2019 -- comes from increasing the tax rates on the very small number of taxpayers with incomes over $250,000. Because this revenue estimate doesn't take into account the extent to which the higher marginal tax rates would cause those taxpayers to reduce their taxable incomes -- by changing the way they are compensated, increasing deductible expenditures, or simply earning less -- it overstates the resulting increase in revenue.

Since the projected revenue from this source is already designated to be used for Mr. Obama's health plan, some other tax increases will be needed. Moreover, Mr. Obama's budget characterizes the projected $634 billion outlay for health-care reform as just a down payment on the program. The budget notes that there would be "additional resources and new benefits to be determined with Congress." Those additional resources would no doubt be even higher taxes.

The third major tax increase is the plan to raise $220 billion over the next nine years by changing the taxation of foreign-source income. While some extra revenue could no doubt come from ending the tax avoidance gimmicks that use dummy corporations in the Caribbean, most of the projected revenue comes from disallowing corporations to pay lower tax rates on their earnings in countries like Germany, Britain and Ireland. The purpose of the tax change is not just to raise revenue but also to shift overseas production by American firms back to the U.S. by reducing the tax advantage of earning profits abroad.

The administration is likely to be disappointed about its ability to achieve both goals. Bringing production back to be taxed at the higher U.S. tax rate would raise the cost of capital and make the products less competitive in global markets. American corporations would therefore have an incentive to sell their overseas subsidiaries to foreign firms. That would leave future profits overseas, denying the Treasury Department any claim on the resulting tax revenue. And new foreign owners would be more likely to use overseas suppliers than to rely on inputs from the U.S. The net result would be less revenue to the Treasury and fewer jobs in America.

It's not too late for Mr. Obama to put these tax increases on hold. If he doesn't, Congress should protect the recovery and the longer-term health of the U.S. economy by voting down this enormous round of higher taxes.

Mr. Feldstein, chairman of the Council of Economic Advisers under President Reagan, is a professor at Harvard and a member of The Wall Street Journal's board of contributors.

Professor Roubini, of New York University's Stern business school, believes that while such a major change is some way off, the Chinese government is laying the ground for the yuan's ascendance. Known as "Dr Doom" for his negative stance, Prof Roubini argues that China is better placed than the US to provide a reserve currency for the 21st century because it has a large current account surplus, focused government and few of the economic worries the US faces.

In a column in the New York Times, Prof Roubini warns that with the proposal for a new international reserve currency via the International Monetary Fund, Beijing has already begun to take steps to usurp the greenback.China will soon want to see the yuan included in the International Monetary Fund's special drawing rights "basket", he warns, as well as seeing it "used as a means of payment in bilateral trade."

Prof Roubini's warning followed the US government's latest economic data that showed producer prices in April experienced their biggest year-on-year drop since 1950, falling 3.7pc.

The number of Americans claiming unemployment benefit for the first time rose by 32,000 to 637,000 in the week to May 9. The increase meant the total number of people claiming benefits stood at to 6.56m, a record high for the 15th consecutive week in a row.

But neither the gloomy data, nor Prof Roubini's verdict on the greenback's future, held back the markets. The Dow Jones traded up 59.89 at 8344.78 in lunchtime trading.

From RealtyTrac: Foreclosure Activity Remains at Record Levels in April RealtyTrac ... today released its April 2009 U.S. Foreclosure Market Report(TM), which shows foreclosure filings - default notices, auction sale notices and bank repossessions - were reported on 342,038 U.S. properties during the month, an increase of less than 1 percent from the previous month and an increase of 32 percent from April 2008. The report also shows that one in every 374 U.S. housing units received a foreclosure filing in April, the highest monthly foreclosure rate ever posted since RealtyTrac began issuing its report in January 2005.

"Total foreclosure activity in April ended up slightly above the previous month, once again hitting a record-high level," said James J. Saccacio, chief executive officer of RealtyTrac. "Much of this activity is at the initial stages of foreclosure - the default and auction stages - while bank repossessions, or REOs, were down on a monthly and annual basis to their lowest level since March 2008. This suggests that many lenders and servicers are beginning foreclosure proceedings on delinquent loans that had been delayed by legislative and industry moratoria. It's likely that we'll see a corresponding spike in REOs as these loans move through the foreclosure process over the next few months."emphasis added

It is not just the Chinese making noises about the reliability of the United States as a debtor. Now, Japanese politicians are doing it too. In fact, the Democratic Party of Japan (which is not in power) have said they would not buy U.S. bonds if elected. An excerpt from a BBC story covering these comments reads as follows: Japan’s opposition party says it would refuse to buy American government bonds denominated in US dollars, if elected.

The chief finance spokesman of the Democratic Party of Japan, Masaharu Nakagawa, told the BBC he was worried about the future value of the dollar.

Japan has been a major buyer of US government bonds, helping the US finance its Federal budget deficits.

But, he added, it would continue to buy bonds only if they were denominated in yen - the so-called samurai bonds.

“If it’s [in] yen, it’s going to be all right,” Mr Nakagawa said in an interview with the BBC World Service.

“We propose that we would buy [the US bonds], but it’s yen, not dollar.”

However observers say that, while the move would be a remarkable policy shift, it was unlikely that Mr Nakagawa’s party will win the forthcoming election, due before mid-September, despite the unpopularity of the ruling Liberal party.

While the Democratic Party is unlikely to gain sway over the electorate in Japan, their comments do reflect a growing unease with the United States’ deficit spending. With dissatisfied noises coming from America’s two largest creditors, the Obama Administration’s policy options for continued reflation appear more limited. In essence, America can inflate and deficit spend at its own risk. Unfortunately, there are not very many other policy options available.

The U.S. reported the first budget deficit for April in 26 years, recording a shortfall in the month that usually sees a jump in individual tax payments before the Internal Revenue Service’s mid-month deadline. “When the government can’t post a surplus in April, you know things are dire,” said Richard Yamarone, director of economic research at Argus Research Corp. in New York. “It’s going to take a very long time until we see anything close to a balanced budget.”Stripping out receipts ONLY, we see a whopping 34% decline from April 2008.

Im curious to see how obama is going to fund health care..............

Here’s what’s going on:

In 2007 and 2008, government tax revenues averaged about $633.15 billion per quarter. For the first quarter of 2009, however, the numbers just in tell us that tax receipts totaled only about $442.39 billion -- a decline of 30%. Looking to confirm the trend, we compared the data for April – the big kahuna of tax collection months – to the 2007-2008 average, and found that individual income taxes this year were down more than 40%. The situation is even worse for corporate income taxes, which were down a stunning 67%!When you add in all revenue from all sources (including Social Security revenue, government fees, etc.), the fiscal year-to-date – October through April – revenue shortfall comes to 19%, vs. the 14.6% projected in Obama’s budget. If, however, the accelerating shortfall apparent year-to-date, and in April in particular, continues, the spread between projected and actual tax receipts will widen considerably.

... What are the implications of this tanking tax revenue?

For starters, it means the federal government deficit is going be as bad or worse than the $2.5 trillion Bud Conrad, chief economist of Casey Research, projected it to be last year.

If the shortfall in individual and corporate tax revenue persists -- and we expect it will -- then the deep hole the government is already digging for itself will be that much deeper. ...

Yet, the real fly in the ointment is that the actual borrowing by the Treasury is likely to be at least half a trillion dollars more than the deficit.

That’s because the Treasury is buying toxic paper (mortgage, credit card loans, etc.) and putting them on the books with a higher value than the market is willing to assign. While that makes the budget deficit appear smaller, it doesn’t negate the fact that the government still must borrow the money needed to buy the toxic paper in the first place. The additional revenue shortfall means they have to raise that much more money. Based on the struggle they had pushing the $14 billion in long-term notes at the latest auction, it becomes increasingly apparent that when push comes to shove, the only way the government is going to come up with the money needed to meet its aggressive spending is to print it up.

alternatively, they can force the capital markets for corporate bonds and equities to vomit out the requisite funding with an end to the short squeeze and a return of the fear trade. but it seems altogether too reasonable to say that the treasury's funding demands in support of wealth transfers and balance sheet expansion are getting far ahead of the kind of cash flow funding that can be provided by household and corporate deleveraging and saving. the result has been rising rates on the long end that -- with apologies to caroline baum -- may or may not be indicative of a positive yield curve signal.

After the 2003 tax rate cuts we had incredible double digit growths in revenues that ended with the inauguration of the Pelosi-Obama congress promising to reverse the cuts especially on investors and employers.

Looks like we have fiscal year to date increases of 17% growth in spending not counting trillions in new future obligations along with a 24% decline in revenues! I guess the promise that the era of irresponsibility is over was just a bunch of BS.

"A budget is more than simply numbers on a page. It is a measure of how well we are living up to our obligations to ourselves and one another." – President Barack Obama

"when push comes to shove, the only way the government is going to come up with the money needed to meet its aggressive spending is to print it up." - But when we print it up we don't really have more money, we are just printing the word dollar on something that is really only a fifty cent piece. I doubt if that is the policy that many of the supporters were supporting.

Maybe someone can help me here, but is there not a constitutional obligation of these officials to protect the value of our currency and honor our obligations??

If we were done borrowing, devaluing our currency would be a very clever trick to lower our debt. Unlike third world countries, we have borrowed at least until now in our own currency. Conversely, the day we have to borrow trillions in yuan or euros we return to third world status asking others for debt rescheduling and forgiveness.

"Im curious to see how obama is going to fund health care" - Of course he is NOT going to fund it because tax rate increases we know are not how you grow revenues.

It all reminds me of a personal story from more than a dozen years ago. I was at a friend's home for a party. He is a conservative, his wife's politics I don't know, but they met at a liberal twin cities college and these were their friends. A gal talking was the daughter of the Minneapolis congressman, Kieth Ellison's predecessor (name withheld) who went on tho become state senator of south mpls and a failed Dem. candidate for Lt. Governor.

She explained in the sweetest most genuine way that the difference between Democrats and Republicans is that Democrats care mostly about others while Republicans care mostly about themselves. I waited for my chance to jump in and tried so hard not to say anything that would get me thrown out before the food was served. I replied that 'Republicans know how to load the wagon and Democrats know how to unload the wagon so we really need BOTH!' She looked stunned and said she never heard anything like that before.

California tax revolt: What next?POSTED AT 8:40 AM ON MAY 19, 2009 BY KARL

The Los Angeles Times claims that the campaign over six state budget propositions on today’s ballot in California ended with a whimper, and seeks to downplay the expected result by predicting a low turnout. But yesterday was more like the calm before the storm.

Tonight’s results will gauge what polls suggest is voter fury over the failure of the Republican governor and the Democratic-controlled Legislature to balance the state’s books.

As Californians struggle with joblessness, home foreclosures and sharp losses in the stock market, the state has raised taxes, cut spending and borrowed to fix a $42-billion shortfall — and still remains more than $15 billion shy of a balanced budget.

If voters reject Propositions 1C, 1D and 1E — the three chief money-raisers on Tuesday’s special election ballot — the shortfall will grow to $21 billion.

Gov. Arnold Schwarzenegger and his Democratic allies trotted out the usual human shields in this fight — kindergarteners, firefighters and policemen, nurses, etc. They outspent their opponents by seven-to-one. None of it worked. Although the opposing sides here did not always follow partisan lines (e.g., the SEIU opposes the initiatives), a recent Field Poll showed 72% of voters agreeing that rejecting the measures “would send a message to the governor and the state legislature that voters are tired of more government spending and higher taxes.”

In the face of expected defeat, Schwarzenegger has fled cross-country to Washington, DC, to listen to Pres. Obama talk about new federal tailpipe emissions. There is even more of a metaphor in the trip than the obvious punchline, as California’s future is likely to be found in DC. California Treasurer Bill Lockyer has already asked Treasury Secretary Timmy Geithner to backstop a wave of short-term borrowing California will need to undertake this summer. Indeed, the Busness Insider notes that the yield on California debt has already been shrinking:

We’d say that the market is probably also pricing in the possibility that Barney Frank will get his way and we’ll have a federal backstop of all muni debt soon enough. Even without a formal backstop, we think it’s unlikely that the Obama administration and a Democrat controlled Capitol Hill would let California default.

This is another way that we’ve broken the signalling function of the credit markets, which no longer provide clear indications of expected economic performance thanks to the numerous and varied government interventions.

This is more of the uncertainty that undermines economic recovery. But an administration running auto companies for the benefit of the UAW and its political viability in the Rust Belt undoubtedly considers the Golden State “too big to fail.” After all, the New York Daily News headline would write itself: “Obama to California: Drop Dead.”

However, bailouts are unpopular. Many Americans will chafe just as much at the prospect of paying to bail out California’s decades of inept govenment as they do at paying to bail out GM’s decades of inept management. Obama would bail out California to hold onto those electoral votes, but he will have to worry about how many he loses in the process.

Bye-Bye Dollar? Brazil and China eye plan to axe dollar(FT) Brazil and China will work towards using their own currencies in trade transactions rather than the US dollar, according to Brazil’s central bank and aides to Luiz Inácio Lula da Silva, Brazil’s president.

The move follows recent Chinese challenges to the status of the dollar as the world’s leading international currency.

Mr Lula da Silva, who is visiting Beijing this week, and Hu Jintao, China’s president, first discussed the idea of replacing the dollar with the renminbi and the real as trade currencies when they met at the G20 summit in London last month.

An official at Brazil’s central bank stressed that talks were at an early stage. He also said that what was under discussion was not a currency swap of the kind China recently agreed with Argentina and which the US had agreed with several countries, including Brazil.

“Currency swaps are not necessarily trade related,” the official said. “The funds can be drawn down for any use. What we are talking about now is Brazil paying for Chinese goods with reals and China paying for Brazilian goods with renminbi.”

Henrique Meirelles and Zhou Xiaochuan, governors of the two countries’ central banks, were expected to meet soon to discuss the matter, the official said.

Mr Zhou recently proposed replacing the US dollar as the world’s leading currency with a new international reserve currency, possibly in the form of special drawing rights (SDRs), a unit of account used by the International Monetary Fund.

In September, Brazil and Argentina signed an agreement under which importers and exporters in the two countries may make and receive payments in pesos and reals, although they may also continue to use the US dollar if they prefer.

An aide to Mr Lula da Silva on his visit to Beijing said the political will to enact a similar deal with China was clearly present. “Something that would have been unthinkable 10 years ago is a real possibility today,” he said. “Strong currencies like the real and the renminbi are perfectly capable of being used as trade currencies, as is the case between Brazil and Argentina.”

Economists have argued that while the SDR plan is unfeasible now, bilateral deals between Beijing and its trading partners could act as pieces in a jigsaw designed to promote wider international use of the renminbi. Any move to make the renminbi more acceptable for international trade, or to help establish it as a regional reserve currency in Asia, could enhance China’s political clout around the world. full article and much more: http://www.ft.com/cms/s/0/996b1af8-43ce-11de-a9be-00144feabdc0.html

The national news media is being surprising silent about the fate Gov. Ahhnolds' ballot initiatives, though I hear they were resoundingly defeated. Any of you left coast types care to fill in the blanks?